TRIPOLI, Libya (AP) -- An intense battle has erupted between about 1,000 rebels surrounding two buildings filled with Moammar Gadhafi loyalists in the neighborhood next to the Libyan leader's captured compound.

Associated Press reporters on the scene Thursday said rebels were hammering the buildings with heavy gunfire and a huge explosion from the battle scene sent a large plume of white smoke.

Mahmoud Bakoush, a rebel commander at the site, says there are rumors that one of Gadhafi's sons might be in the buildings, but they are unconfirmed. BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

TRIPOLI, Libya (AP) - Moammar Gadhafi is safely in hiding and leading the battle against the Libyan rebels, his spokesman said Thursday, as fierce gunfights broke out in Tripoli while the opposition tried to assert control over the oil-rich country.

Moussa Ibrahim said in a phone call to the Associated Press the longtime dictator was in Libya and his morale was high. Gadhafi "is indeed leading the battle for our freedom and independence" said Ibrahim, who was recognizable by his voice.

Ibrahim refused to say where in Libya Gadhafi was hiding Ibrahim, who had for months appeared daily in televised news conferences since the start of the rebellion six months ago, added he himself was in an undisclosed location in Libya and constantly on the move.

"All of the leader's family are fine," Ibrahim said, adding that top military and political aides remained with Gadhafi.

He said Gadhafi was capable of continuing resistance for "weeks, months and years."

Ibrahim claimed Gadhafi's forces controlled a "good portion" of the capital - a claim that contradicts what reporters are seeing on the ground - and other cities and towns. He also accused NATO of besieging Gadhafi strongholds such as Sirte.

The call came as an intense gunbattle broke out in the Tripoli neighborhood of Abu Salim, a pro-Gadhafi stronghold. Another battle erupted outside the Corinthia hotel where many foreign journalists are staying, as about a dozen rebels with machine guns and an anti-aircraft gun fired on what appeared to be loyalist gunmen shooting from nearby high-rise buildings.

The rebels are struggling to take complete control of Tripoli, four days after they swept into the capital and sparked the collapse of Gadhafi's regime. The autocrat has refused to surrender and has vowed from hiding to fight on "until victory or martyrdom."

The rebel leadership has offered a $2 million bounty on Gadhafi's head, and British Defense Secretary Liam Fox said Thursday that NATO was helping in the search for the longtime dictator.

Fox told BBC Radio 4 that NATO was "providing intelligence and reconnaissance assets to help in the hunt," and had been heavily active in carrying out overnight airstrikes against Gadhafi loyalists, but refused to say if British special forces were involved.

In Brussels, a NATO official said some airstrikes were launched because Gadhafi's forces had been detected trying to restore some of their damaged weapons systems, including surface-to-air missiles, which the official called a "huge threat" to alliance aircraft and humanitarian aid flights.

The official could not be identified under NATO rules. A months-long NATO air campaign, which included about 7,500 attacks on Gadhafi's forces, was key to helping the rebels sweep through the country.

Rebels say one of their key targets now is Gadhafi's hometown of Sirte, about 250 miles (400 kilometers) from Tripoli, but acknowledged that capturing that city would not be easy because Gadhafi's fellow tribesmen were expected to put up a fierce fight. Opposition leaders have said they were trying to negotiate a peaceful surrender of the city.

Mustafa Abdel-Jalil, head of the rebel National Transitional Council, called on people living in loyalist-held towns to join the fight against Gadhafi's soldiers.

"I am appealing to the areas not yet liberated to join the revolution," he told reporters in Benghazi. "There is no excuse for them not to join."

Fawzi Abu Ketf, deputy defense minister of the rebel National Transitional Council, said fighting was raging Thursday outside Bin Jawad, 400 miles (650 kilometers) south of Tripoli, but he had no details. Gadhafi loyalists ambushed rebels advancing toward the city on Wednesday, killing at least 20 of them.

Wednesday's attack was carried out by pro-Gadhafi forces who had retreated from the oil city of Ras Lanouf after rebels captured that city earlier this week, said Ahmed Zeleity, a rebel commander.

The ambush showed that pro-regime forces retain the ability to strike back even as the rebels tighten their control over the nation's capital.

Rebels also have seized several parts of Sebha, another Gadhafi stronghold still holding out, including the main commercial Gamal Abdel-Nasser street, according to rebel official Adel al-Zintani, who is in daily telephone contact with rebel commanders in the desert city.

He said mercenaries from sub-Saharan African nations who had been paid by Gadhafi have fled the city, but loyal soldiers were continuing to hold firm.

Ketf said another challenge was the need to supply troops at the front. "The supply lines will be too long and we are short of funds and supplies," he said.

The humanitarian situation there is increasingly difficult, he said, with lengthy power and water outages.

In Milan, Italian Premier Silvio Berlusconi said Italy was preparing to release $505 million in frozen assets in Italian banks, calling it the first payment. Italy, Libya's former colonial ruler and biggest trading partner, has not disclosed the total Libyan assets held there.

Berlusconi made the announcement after meeting with the leader of Libya's rebel Cabinet, the second stop on a European diplomatic tour by Mahmoud Jibril aimed at securing the release of billions of dollars in frozen Libyan assets.

The Libyan opposition says they urgently need at least $5 billion of those assets to pay state salaries, maintain vital services and repair critical oil facilities.

The U.N. Security Council, meanwhile, is preparing to vote this week on a resolution that would release $1.5 billion in Libyan assets in U.S. banks that the world body froze to thwart Gadhafi. Analysts estimate as much as $110 billion is frozen in banks worldwide.

Reflecting the continuing unrest in parts of Libya, a Maltese ship sent to evacuate foreigners from Tripoli turned back Thursday after fighting in the Libyan capital made the operation too risky.

The vessel was to evacuate at least 24 foreigners trapped in the Libyan capital, but the Maltese government said the mission was aborted Thursday after it became impossible for people to reach the harbor due to fighting in the capital.

The Geneva-based group the International Organization for Migration, however, said a ship chartered to rescue hundreds of foreigners in Tripoli had managed to dock there, after waiting offshore for days due to fighting.

The group is "very optimistic that we will be able to carry out the evacuation today," spokeswoman Jemini Pandya said.

In more positive news, four Italian journalists taken at gunpoint in Libya were freed Thursday in a raid on the house where they were being held, an official said.

Details of the raid, first reported on Corriere della Sera's website, and who conducted it were not immediately available. The Italian Foreign Ministry confirmed that the four were freed, but had no further details.

The four were taken at gunpoint Wednesday by forces loyal to the regime of fugitive Libyan dictator, Moammar Gadhafi. Their Libyan driver was killed.

"They shot the driver dead in front of us. We are fine, but our thoughts are with the driver who died. We have become close friends with him," Claudio Monici of Avvenire, the daily of the Italian bishops conference, told reporters in Tripoli after their release.

The others released include two correspondents from the Milan daily Corriere della Sera and one from Turin's La Stampa.

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Associated Press writer Rami al-Shaheibi in Benghazi and Donna Bryson in Cairo contributed to this report.